December 26, 2011

China May Form More Credit Ratings Agencies

Country would reduce reliance on foreign raters, use government-backed firms

U.S. Treasury Secretary Timothy Geithner (left) with Zhou Xiaochuan, China’s central bank governor. (Photo: AP) U.S. Treasury Secretary Timothy Geithner (left) with Zhou Xiaochuan, China’s central bank governor. (Photo: AP)

The head of the People's Bank of China said Sunday that the financial institutions should reduce their reliance on foreign credit-rating agencies and that the nation is considering forming its own such entities which would be backed by the government. 

Zhou Xiaochuan, China’s central bank governor, made the comments in a speech at a financial forum in Beijing, according to Bloomberg news. China has been critical of the independence of the so-called "big three" ratings firms of Moody’s, Standard & Poor’s and Fitch Ratings and has questioned their independence from the firms they review. The country has sought an alternative to those firms and in September of 2010 set up its own rating company, called China Credit Rating Co., which makes investors pay for ratings rather than borrowers.

Lu Zhengwei, Shanghai-based chief economist at Industrial Bank Co.,  who was rated the nation’s best analyst in 2010 by the newspaper China Business News, was quoted by Bloomberg saying, "With the rapid expansion in China’s bond market, we need rating companies that are familiar with the Chinese situation. We see comments from rating companies during this round of the crisis have influenced the financial market to a large degree. It’s no surprise China is paying attention to them.”

The National Association of Financial Market Institutional Investors, formed by the central bank in 2007 to help develop the country’s over-the-counter financial markets, issued a draft report in July that said, in part, that overseas rating companies’ earnings models cause “a strong beneficial alliance between the issuer and the ratings agency that cannot avoid influencing the agency’s independence.”

Last week, local Chinese media reported that the State Council, China’s Cabinet, has designated the central bank to regulate the country’s credit-rating companies. That makes it the sole regulator of the industry.

Zhou also said that domestic Chinese ratings companies could be helped to grow by being required to rate a Chinese financial product if one of the international companies rates it. He also said that such firms could expand their role by researching the finances of local or municipal government, since this is a sector in which foreign companies do not have sufficient expertise.

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